I am a partner of Riser Adkisson LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My practice is in the area of creditor-debtor law, and I am the author of books on asset protection and captive insurance. I have been an expert witness to the U.S. Senate Finance Committee, and am very active in the American Bar Association, and currently am the Chair of the Committee on Captive Insurance. I was also the collection attorney for the $20+ million judgment by the San Francisco Bay Guardian against the holding company of the Village Voice chain. I am serving as an American Bar Association adviser to the Uniform Law Commission's revisions of the Uniform Fraudulent Transfer Act and the new Series of Unimcorporated Business Entities Act.

Debtor Donald G. Huber (Donald) founded United Western Development, Inc. (UWD) in 1968 to invest in real estate. In 2001, Donald was joined by his son, Kevin D. Huber (Kevin), who thereafter was heavily involved in UWD’s business.

UWD built large home developments, predominantly in the Pacific Northwest. These developments required UWD to obtain substantial financing, which debt Donald was of course frequently required to personally guarantee.

By 2007, as the real estate markets were starting to sink, Donald and one of his business partners, Robert Terhune (Robert), began to worry about certain of their real estate projects and their commitments to each other. When Robert threatened to set up an asset protection trust to stiff Donald, Donald’s attorney made it clear to Robert that Donald would consider the setting up of such a trust to be a fraudulent transfer as to Donald as Robert’s potential creditor.

In August 2008, UWD entered into a $55 million financial deal to be raised by private finance group Houlihan Lokey, some of which was used to retire old debt and some to be used for future projects. By this time, the real estate market crashed, and UWD’s attempts to raise additional financing were unsuccessful.

By this time, it was clear that Donald himself was concerned about the sinking real estate market, and the creditors beginning to circle UWD’s financial carcass. Donald and Robert began missing payments in 2008, and in 2009 began receiving notices of default and lawsuits by lenders.

Enter Seattle estate planning attorney Harold Snow (Attorney Snow). In August 2008, while UWD was inking its deal with Houlihan Lokey to try to find additional financing, Donald’s son Kevin sent an e-mail to Snow, telling him that “my father has some assets that he would like to protect and shield.”

Thereafter, and though Donald was up to his neck in personal guarantees, Attorney Snow set up an Alaska domestic asset protection trust (DAPT) called the “Donald Huber Family Trust” on September 23, 2008. According to correspondence later acquired by creditors, it was a principal goal of the Alaska DAPT to “protect a portion of [Donald's] assets from [his] creditors.” There was also much evidence that Donald urgently wanted the Alaska DAPT set up.

Guided by Attorney Snow, Donald transferred $10,000 in cash and his interests in over 25 of his companies into DGH, LLC, an Alaska LLC set up on September 4, 2008. Then, Donald apparently funded the Alaska DAPT with a 99% interest in DGH, LLC, with the other 1% being owned by Kevin as the manager.

Donald also transferred other of his valuable assets, such as his personal residence, into another Alaska corporation, and then the stock was transferred to DGH, LLC. The residence was then leased back to Donald, and the Alaska DAPT made the mortgage payments. Donald admitted that he received no consideration for these transfers.

In what may fairly be viewed as one of the most blatant attempts to cheat creditors seen in some years, Donald ended up getting two residences, interests in several shopping centers, shares of companies, including UWD’s operating businesses, and $3 million in account receivables into the Alaska DAPT. Donald was left with little more than underwater or valueless assets.

Attorney Snow set up the structure so that Donald was the Settlor of the Alaska DAPT, while his son Kevin, another person, and Alaska USA Trust Company were the Trustees. The beneficiaries of the Alaska DAPT were Donald and his children, stepchildren, and grandchildren. In 2009, the Trust had $360,000 discretionary beneficiary income, and $345,248 in 2010. Donald himself made requests for distributions from his son Kevin as a Trustee, and Kevin mostly complied.

Though Donald and his family were receiving benefits, Donald’s creditors were stiffed.

Except for a single Certificate of Deposit for $10,000 which was held in Alaska, all the other assets were located in Washington State. Indeed, Alaska USA Trust Company hardly did anything, and the Court characterized their involvement as “acting merely in the nature of a straw man.”

If either Attorney Snow or Alaska USA Trust Company had even the slightest ethical or moral qualms about helping Donald cheat his creditors, such is not easily found in the record. To the contrary, with Donald’s personal guarantees outstanding and his real estate holdings valued at 2008 fire sale prices, one must wonder what his “Affidavit of Solvency” (a requirement under Alaska law) looked like.

Hounded by his creditors, Donald eventually tried to file a Chapter 11 reorganization case on February 10, 2011. But by the end of the year, the creditors were able to convert the case to a Chapter 7 liquidation and a Bankruptcy Trustee was appointed. The Bankruptcy Trustee brought an Adversary Action against Donald, Kevin, the Alaska DAPT, Alaska USA Trust Company, and Donald’s companies. The Amended Complaint alleged:

Sixth Cause of Action — For declaratory judgment that the Bankruptcy Trustee has full membership rights in the Alaska DAPT’s main holding company, DGH LLC, and has the power to vote its interests in Donald’s companies holding shopping malls.

For its part, Alaska USA Trust Company pretty quickly bailed from the case, by a settlement agreement dated December 12, 2012, paying the Bankruptcy Trustee $5,634.95 in cash, and agreeing to fully cooperate in the litigation, including producing whatever documents and e-mails that it had relating to the case.

After some skirmishing, the Bankruptcy Trustee simultaneously filed two Motions for Summary Judgment: First, for summary judgment on the fraudulent transfer and related issues; and, second, to deny Donald a discharge. The Court decided both of these motions in the same Opinion, as shall now be discussed.

The Choice Of Law Issue

The Court selected for its first issue that of choice of law, i.e., whether Alaska law or Washington state law applied.

In federal court, federal choice of law rules apply. With regard to trusts generally, the Court looked to Section 270 of the Restatement (Second) of Conflict of Laws, which says that the laws of the state whose laws are selected by the settlor will normally apply, so long as the application of that state’s law “does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship”. Comment (b) to section 270 further elaborates that

a state has a substantial relation to a trust if at the time the trust is created: (1) the trustee or settlor is domiciled in the state; (2) the assets are located in the state; and (3) the beneficiaries are domiciled in the state.

The Court cited to a case that I discussed last year in some depth, In re Zukerkorn, 484 BR 182, 192 (9th Cir.BAP, 2012). See Zukerkorn — Possible Bad News For Domestic Asset Protection Trusts In Conflict-Of-Laws Dispute, at http://goo.gl/0nWZi

Here, Donald’s Alaska DAPT flopped on all three grounds: (1) Donald resided in Washington state and not Alaska, (2) except of a single $10,000 Certificate of Deposit, none of the assets were in Alaska and all were in Washington state, and (3) all the beneficiaries resided in Washington state, and none in Alaska. Therefore, Alaska “had only a minimal relation to the Trust” under section 270 comment (b).

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